Many struggling forex traders are in that position because they don’t realize one thing: the job of a professional trader is to isolate the least random market information and then take risks that are proportional to their trading capital. I say “least” random because a “non” random condition would mean that the particular setup would work 100% of the time. Traders must always face the possibility of a loss. The problem is most amateur traders do not consider trading a game of probabilities, they instead consider it a game of predicting the future.
When I speak to many newer traders or some who have been trading for a year or less, and I ask them to explain one of their setups that they look for, they can never answer the question. A setup is your statistical base. It means you have done the research, or you learned from someone who has done the research for you and can take trades knowing that this setup has a 60% chance of working in current market conditions. This type of trading is not common amongst amateurs for many reasons, but I the biggest ones I would point out are: lack of tools and lack of motivation. People who come into the trading business are mostly looking for an easy way to make money. They don’t want to hear or learn about a statistical approach to trading. Learning technical analysis is hard enough.
People love easy, we are wired that way. It is so easy to listen to someone else’s “predictions”. Where the market should go and why. It is even easier for someone to bet money on someone else’s ideas because if they don’t work, your ego or self esteem won’t suffer. Trading your own account with very basic mainstream information, especially if it is coming from any media outlet is the same. It will lead to a shrinking account. If you want to succeed in trading forex, it is very important that you first adopt a perspective, and second have a way to measure the statistical relevance of your methodology.
Does intuition play a role in trading? Yes. Trading is repeatedly described as a cross between art and science. The statistical tools are the science, but gauging the sentiment and how relative it is to the current market conditions is something a computer cannot do quickly and easily. The human mind can adjust faster and recognize more information that can filter a computer’s view more effectively. Here at SMB, a well respected trader recently said, “The new trader is bionic” which means he is relying more on computers to provide statistical solutions to emerging trading scenarios, but must still exercise some discretion because a computer is limited in scope. Think of a computer as a tool that expands the abilities of a trader, not replace them.
So what is the solution for the struggling trader? Always pursue your market education, but in addition, learn how to apply statistical tools to your strategies and automate everything that you possibly can. If you are not an engineer, then you must partner with one if you want to thrive as a trader. Technical analysis is not just oscillators and trend lines, it gets much more sophisticated and being able to analyze data in creative ways is the key to evolving into a successful trader. So keep learning, but make sure to acquire the resources or talent to stay effective in today’s currency markets.
—
Marc Principato, CMT
*No Relevant Positions